Vaughan v. McMinn

Decision Date22 September 1997
Docket NumberNos. 96SC497,96SC504,s. 96SC497
Citation945 P.2d 404
PartiesStacey VAUGHAN and Axia Services, Inc., Petitioners, v. Robert McMINN, Respondent. ZURICH AMERICAN INSURANCE OF ILLINOIS, Petitioner, v. Daniel F. RAEL and Yvonne M. Rael, Respondents.
CourtColorado Supreme Court

Gibson Dunn & Crutcher, L.L.P., Gregory J. Kerwin, Phillip F. Smith, Jr., Denver, for Petitioners Stacey Vaughan and Axia Services, Inc.

Roger Fraley, Jr., Denver, for Respondent Robert McMinn.

Hibschweiler & Johnson, James D. Johnson, Sheila E. Barthel, Denver, for Petitioner Zurich American Insurance Company of Illinois.

Wilcox & Ogden, P.C., Ralph Ogden, Denver, Steven U. Mullens, P.C., Steven U. Mullens, Colorado Springs, for Respondents Daniel and Yvonne Rael.

Retherford, Mullen, Johnson & Bruce, L.L.C., Neil C. Bruce, Colorado Springs, for Amicus Curiae Colorado Defense Lawyers Association.

John Berry, Denver, for Amicus Curiae The Workers' Compensation Coalition.

Justice BENDER delivered the Opinion of the Court.

This proceeding under C.A.R. 50 is the consolidation of two lawsuits, each involving an insured who filed a common law tort claim against his insurance company for bad faith in handling the insured's workers' compensation claim. The insurance companies, the petitioners in this court, moved to dismiss for lack of subject matter jurisdiction. In both cases, the district court granted the motion, reasoning that the General Assembly's 1991 amendment to section 8-43-304(1), 3 C.R.S. (1997) of the Colorado Workers' Compensation Act (the Act) abrogated the common law tort of bad faith in the context of workers' compensation by providing the insured with an exclusive administrative mechanism to redress the insurance company's mishandling of its insured's claim. Both district courts concluded that the statutory remedy provided by section 8-43-304(1) divested district courts of jurisdiction over common law claims of bad faith mishandling of workers' compensation claims by their insurance company. The insured claimants appealed to the court of appeals. Before the resolution of that appeal, however, the insurance companies petitioned this court for immediate certiorari review under C.A.R. 50. We granted certiorari and consolidated the two actions for purposes of this proceeding. 1

The 1991 amendment to section 8-43-304(1) does not explicitly, or by necessary implication, preclude a private civil remedy for an insurer's mishandling of a workers' compensation claim. We hold that the 1991 amendment did not abrogate the common law tort of bad faith breach of an insurance contract in the context of a workers' compensation claim. This tort remains a viable cause of action in Colorado. We reverse the holding of both district courts and remand to the respective district courts for further proceedings consistent with this opinion.

I.

Respondents in this court, plaintiffs in the district court (the claimants), requested workers' compensation benefits after they allegedly sustained injuries during the course and scope of their employment. They subsequently sued their workers' compensation carriers, 2 alleging, among other things, that the insurance companies failed to process their claims in a timely manner and failed to pay benefits to which they were entitled. 3 The claimants proceeded on a common law tort theory for bad faith mishandling of an insurance claim, a cause of action that we held applicable in the workers' compensation context in Travelers Insurance Co. v. Savio, 706 P.2d 1258, 1271 (Colo.1985).

The insurance companies moved to dismiss, arguing that this tort was no longer a valid cause of action. The insurance companies contended that the General Assembly's 1991 amendment to the Act abrogated the 1985 holding of Savio by creating an exclusive administrative remedy for bad faith claims, which divested district courts of jurisdiction over common law torts of bad faith. The district courts agreed that Savio was no longer controlling precedent and granted the insurance companies' motions to dismiss.

The claimants appealed and the insurance companies responded by petitioning this court for certiorari review under C.A.R. 50, 4 to determine whether the 1991 amendment to section 8-43-304(1) abrogated the common law tort of bad faith in mishandling a workers' compensation claim which we set forth in Savio.

II.

Every insurance contract contains an implied covenant of good faith and fair dealing which imposes upon insurers a duty to act in good faith in their dealings with their insured. See Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984). A breach of the covenant of good faith and fair dealing by an insurer may give rise to tort liability. The basis for this liability is the special nature of the insurance contract relative to other types of contracts. As we explained in Trimble:

The motivation of the insured when entering into an insurance contract differs from that of parties entering into an ordinary commercial contract. By obtaining insurance, an insured seeks to obtain some measure of financial security and protection against calamity, rather than to secure commercial advantage. The refusal of the insurer to pay valid claims without justification, however, defeats the expectations of the insured and the purpose of the insurance contract. It is therefore necessary to impose a legal duty upon the insurer to deal with its insured in good faith.

Id. (citations omitted).

Because workers' compensation serves the same purpose as insurance in general, we acknowledged the applicability of the common law covenant of good faith and fair dealing to workers' compensation insurance contracts in Savio, 706 P.2d at 1271. The insurance company in Savio argued that the covenant of good faith and fair dealing should not apply in the context of workers' compensation because the Act is a comprehensive statutory scheme which abrogates all civil remedies for torts within the scope of the Act. We agreed that the Act established exclusive as well as comprehensive remedies for injuries that are covered by the Act, see id. at 1264; however, we determined that injuries incurred because of an insurer's bad faith in processing a claim fell beyond the scope of the Act. See id.; see also Brooke v. Restaurant Servs., Inc., 906 P.2d 66, 67 (Colo.1995). We stated that the Act is primarily directed to compensation for employment-related injuries and death, and that injuries from the mishandling of a claim do not arise out of and in the course of employment. See Savio, 706 P.2d at 1265. We analogized an insurer's bad faith conduct to the tortious acts of a co-employee acting outside the course of employment and to the malpractice of an employer's physician, both of which constitute causes of action which may be brought directly by an employee outside of the Act's administrative procedures. See Wright v. District Court, 661 P.2d 1167, 1171 (Colo.1983); Kandt v. Evans, 645 P.2d 1300, 1302 (Colo.1982). We stated that the Act contained no limitation on the potential remedies available for such conduct. See Savio, 706 P.2d at 1264. Emphasizing that "this court has declined in the past to find legislatively imposed limits on an employee's remedies outside of the Act unless such limits are express," we concluded that the tort of bad faith applied to aggrieved claimants seeking redress against their insurance carriers.

In Savio, the insurance company pointed to two provisions of the Act that authorized the imposition of a penalty for insurer misconduct. Section 8-44-106, 3 C.R.S. (1973) provided that the intentional, knowing, or willful violation of the Act would result in the suspension or revocation of the carrier's license to conduct a compensation business in Colorado. The second provision was the predecessor to section 8-43-304(1), which, at the time of Savio's accident, read:

Any employer or insurer ... who violates any provision of [this Act] ... for which no penalty has been specifically provided, or fails, neglects, or refuses to obey any lawful order made by the director or commission or any judgment or decree made by any court as provided by [this Act] shall be punished by a fine of not more than one hundred dollars for each such offense.

§ 8-53-126, 3 C.R.S. (1973). The insurance company argued that these penalty provisions provided the insured with a statutory remedy and, by implication, abolished the common law tort of bad faith. See Savio, 706 P.2d at 1266. However, the penalty assessed under section 8-43-304(1) was payable to the workers' compensation fund rather than to the aggrieved claimant. See Savio, 706 P.2d at 1267. We rejected the insurance company's assertion that the penalty statutes provided a remedy for the insured claimant, because the provisions did not provide for a remedy payable to the aggrieved claimant.

In 1991, the General Assembly repealed and reenacted the Act. Among the changes was an amendment to section 8-43-304(1) which increased the penalty for mishandling claims from one hundred to five hundred dollars per day, and provided that this penalty was payable to the aggrieved claimant rather than the subsequent injury fund. See ch. 219, sec. 35, § 8-43-304(1), 1991 Colo. Sess. Laws 1291, 1323-24. The General Assembly amended this statute again in 1992 to require that seventy-five percent of the assessed penalty would be payable to the aggrieved claimant and the remaining twenty-five percent would be payable to the subsequent injury fund. See ch. 238, sec. 1, § 8-43-304(1), 1992 Colo. Sess. Laws 1828. 5

The insurance companies argue that the 1991 amendment was the General Assembly's response to our holding in Savio, and that this amendment evinces the legislative intent to provide an exclusive administrative remedy for the bad faith mishandling of a workers' compensation claim. They argue that the 1991 amendment abrogated the common law tort claim for bad faith...

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